Eminent domain proposal for mortgages gains traction in California

Cities in the Golden State are once again testing a controversial mortgage relief plan that could use local eminent domain powers to help residents stung by the last housing crisis.

El Monte is the latest city to weigh the plan — opposed by the financial industry but embraced by some housing advocates and city councils.

California became the center of the national debate over the idea last year when San Bernardino County and two of its cities, Ontario and Fontana, toyed with adopting the strategy. But the Inland Empire communities ultimately shelved the plan, marketed by San Francisco firm Mortgage Resolution Partners, after Wall Street groups voiced strong opposition and little public support materialized.

Now the idea is gaining traction again, with the city of Richmond, Calif., last week becoming the first to press forward. The hardscrabble Bay Area city announced that it had asked the holders of more than 620 underwater mortgages — on which the borrower owes more than the home is worth — to sell the loans to the city at a discount. The city would then write down the debt and refinance the loans for amounts in line with current home values.

If lenders refuse, the city could use eminent domain powers to force the transaction, a move widely expected to bring lawsuits from the financial industry.

Eminent domain is typically used to seize land, not loans, to serve the public good, as when local governments seize blighted property or land needed for projects such as a highway. But the unorthodox plan by Mortgage Resolution Partners would use the power to force private investors to sell mortgages.

El Monte, which is also consulting with Mortgage Resolution Partners, is considering the same strategy. Its mayor, Andre Quintero, said he supports the plan because the federal government has failed to do enough to help troubled borrowers hurt by the housing crash.

"It is a little frustrating," Quintero said. "Wall Street got a lot of the bailouts and benefits, and you are seeing the market has really shot back to life in really a huge way, but Main Street is still suffering."

The mayor, the city manager and the city attorney discussed the eminent domain proposal with the full City Council on Tuesday night during a closed session. The council deferred a decision on the matter, the mayor said.

"We are continuing to do our due diligence," Quintero said in a text message from the meeting.

The mortgage relief efforts are gaining traction even as rising prices have freed many homeowners from negative equity positions. Meanwhile, new buyers and investors have slashed the once-huge inventory of foreclosed properties.

Quintero and City Manager Raul Godinez II last week met with several financial industry groups to hear their concerns over the eminent domain proposal. At that meeting were representatives from the Securities Industry and Financial Markets Assn., a powerful Wall Street lobbying group, as well as representatives from Newport Beach-based Pacific Investment Management Co., the mayor said. Representatives of banking associations and real estate groups attended as well, according to the mayor.

Wall Street groups have urged the city to not take any action, and to wait and see how Richmond's approach unfolds. In El Monte's case, fewer than 150 homeowners might be eligible for help under the plan, according to an analysis done by the Royal Bank of Scotland on behalf of DoubleLine Capital of Los Angeles.

"We now have a test case. Richmond, Calif., is going to go out there and try and do this," said Vincent A. Fiorillo, a portfolio manager at DoubleLine and president of the board of the Assn. of Mortgage Investors, a Washington lobbying group. "There is no reason for anybody to do anything until we see how it plays out."

At least three other California municipalities — La Puente in Los Angeles County, and Orange Cove and San Joaquin in Fresno County — are also consulting with Mortgage Resolution Partners. Half a dozen other cities in the state have engaged in less formal discussions with the firm.

North Las Vegas, Nev., has also approved a plan to move forward with the firm on a similar plan.

"We are very optimistic that El Monte and other communities in Southern and Northern California will continue down the process of trying to find principal reduction for their homeowners," said Steven Gluckstern, chairman of Mortgage Resolution Partners. "This movement is being taken up by not just MRP but by community organizations and nonprofit and housing advocates as a viable and important solution to the underwater home problem."

The Securities Industry and Financial Markets Assn. has been a hefty opponent of the eminent domain plan, with its managing director, Timothy Cameron, appearing at a number of municipal meetings to speak against it. Cameron has called the plan an overreach that would nullify valid contracts and hurt the local housing market by making loans more expensive in the jurisdictions adopting the strategy.

An eminent domain mortgage plan would harm not only communities financially, he has said, but also pensioners, endowments, individual investors and others who had invested in the so-called private-label mortgage securities that the plan targeted. Litigation is highly likely, he said.

"I would be tremendously surprised if the investor community … did not come to the table and bring an action to protect the interests of their clients," Cameron said.